Is investment a cup of tea only for the elite?
It’s a good question; a question that is frequently asked, and one that is quite certainly omnipresent in the minds of most astute mortals. Well, the good news is that it isn’t. It is for anybody who wants a shot at becoming wealthy and have a passive income. Much to your disdain, becoming rich isn’t just about earning money. More importantly, it is the skill to hold on to the money that you earn and multiply it, and that is exactly where smart investment comes into the picture.
Here is a list of the six common investment mistakes that you need to avoid while making your investments, so you don’t end up burning a hole in your pocket.
6 Common Investment Mistakes
1. Expecting too much from the stock
As much as you would hate to hear it, the bitter truth is that the sole act of investing is not going to solve all your financial troubles. It is not uncommon for people to treat small sized investment as a lottery ticket. This is an inappropriate mindset to start off investing with. Your expectations from the performance of your shares should be practical and realistic, even if those numbers aren’t as pretty as you would have liked them to be.
Indulge in due diligence instead of blindly trusting the financial gurus, investment advisors promising outsized returns, the numerous newsletters, and the endless media hype. That is not the way to manage your investments. Turn off the TV and shun the panic.
Read Also: 10 Myths About Investing in Share Markets
2. Investing without a plan
As they say, a goal without a plan is just a wish! So, what’s the solution to this?
Create a disciplined personal investment plan based on mathematical expectancy addressing your goals and objectives, risks and appropriate benchmarks. Anything less than that is gambling and not investing.
You should determine your goals and accordingly invest for short term or long term. Short-term investments may not give your investments enough time to grow.
Planning is essential for the long-term goals such as gathering money for your retirement or your child’s college education, these qualify as appropriate goals. You need to evaluate the risks relevant to your portfolio.
3. Not thinking of diversification
Diversification, when used wisely, is an invaluable investment risk management tool. It adds value to your assets only when the newly added asset has a different risk profile altogether. You’re simply distributing the money of investment entirely diverse kinds of assets such as stocks, bonds, cash, real estates or maybe even precious metals and collectibles.
The logic is pretty simple – you manage the risks better because even if those things drop in value, you won’t incur as much loss, as you will have the money invested in several other things.
At times, some things work in a reverse manner, such as bonds perform better when stock take a plunge and vice a versa. More often than not, people fail to diversify as much with more important things like the retirement savings. While this strategy may not necessarily ensure you a profit but it will most certainly save you from a scarier loss!
4. Focusing on expenses or taxes
Payment of taxes and fees, though an important aspect of your investment, do not call for the intensive spotlight. Often, it proves detrimental to itself. Though making a move to pay lower taxes is undoubtedly a smart one, it still does not justify holding on to investment to levy off the taxes. The taxes you pay on investment gains are often insignificant in comparison to a good investment strategy. Go through the debt review articles on the internet to know more about how you can clear your debt.
Taxes and expenses are just one factor to analyze how a certain transaction will probably affect your overall portfolio performance. Other aspects such as asset allocation, risk management, and expected rewards are of greater priority that overrides taxes and expenses.
5. Trading too much and often
Humans are greatly driven by emotions and investing (read: gambling) is an endless temptation. You tend to get into the ‘game’ of playing around with your investments.
News and media hype about certain stock or the baseless presumptions of the self-proclaimed investment gurus most often lead to terrible investment decisions.
You tend to get into the flow and move your investments around more frequently than you must. This goes on to generate large amounts implications of tax and transaction fees.
6. Investing without emergency fund protections
As the name suggests, emergency funds are for unplanned situations and not to meet the planned goals. They serve as a protective net. Emergencies arrive uninformed and need immediate actions. It may present in the form of a medical emergency that calls for the immediate arrangement of funds or sudden unemployment that may cause a setback in the financial status of a family.
In situations like these, with the absence of an emergency fund to fall back on, you may have to borrow money from your friends or relatives. You might even have to take a personal loan or pledge jewels and return it by paying interest. If the requirement is huge, it may ultimately need you to break a long-term investment to tide over the situation.
However, paradoxically, most investors end up repeating one of these common investment mistakes that have been discussed above. And as failures are the biggest teachers, these lessons along with some worthwhile experiences will eventually push you to fly high and shine bright, albeit after a few falls!
Author: Jackson Maven